Taxation in the US: Payroll tax (Federal Insurance Contributions Act (FICA))

The Federal Insurance Contributions Act (FICA) is a United States federal payroll (or employment) contribution directed towards both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for retirees, people with disabilities, and children of deceased workers.

Calculation.

Overview.

Share of federal revenue from different tax sources. Individual income taxes (blue), payroll taxes/FICA (green), corporate income taxes (red).

The Federal Insurance Contributions Act is a tax mechanism codified in Title 26, Subtitle C, Chapter 21 of the United States Code.

Social security benefits include old-age, survivors, and disability insurance (OASDI); Medicare provides hospital insurance benefits for the elderly. The amount that one pays in payroll taxes throughout one's working career is associated indirectly with the social security benefits annuity that one receives as a retiree. Consequently, Kevin Hassett wrote that FICA is not a tax because its collection is directly tied to benefits that one is entitled to collect later in life. However, the United States Supreme Court ruled in Flemming v Nestor (1960) that the Social Security system is neither a pension nor an insurance program and that no one has an accrued property right to benefits from the system regardless of how much that person may have contributed. FICA therefore behaves as a tax for all practical purposes, earmarked for particular uses by Congress but fully subject to Congressional authority, including redirection.

The FICA tax applies to earned income only and is not imposed on investment income such as rental income, interest, or dividends. The Hospital Insurance (HI) portion of FICA, which funds Medicare Part A hospital benefits, applies to all earned income, which the OASDI portion of the tax is imposed on earned income only up to cap annually set by Congress ($137,700 in 2020). In 2004, the Center on Budget and Policy Priorities stated that three-quarters of taxpayers pay more in payroll taxes than they do in income taxes. FICA is subject to neither the standard deduction nor any personal exemption and so is generally considered to be a regressive tax.